What Is a Trigger Rate – and How Does It Impact Your Mortgage?

Mortgage Trigger Rate

Table of Contents

On September 7, 2022, the Bank of Canada (BoC) continued its fight against soaring inflation by raising its target for the overnight lending rate to 3.25%. Since March this year, Canada’s central bank has hiked interest rates by 3%.

The BoC’s ongoing rate increases have not been kind to homeowners, primarily those who hold variable-rate mortgages. And with further rate hikes anticipated, many risk hitting what’s known as the “trigger rate,” which can have significant implications for their future mortgage payments. 

In short, exceeding this threshold may result in higher mortgage payments – a bleak prospect for Canadians already struggling with rising living costs and other debt. 

Do you have a variable-rate mortgage with fixed payments and are concerned about the consequences of hitting your trigger rate? If so, it’s wise to become familiar with this obscure but increasingly relevant concept.

Contact A Trustee

In this article, we’ll explain:

  • How trigger rates affect variable-rate mortgages 
  • How to determine your trigger rate
  • What happens to your mortgage payments once you hit your trigger rate
  • How to prepare financially to better manage your mortgage payments

Let’s begin!

What is a trigger rate, and how does it work?

The trigger rate is the interest rate at which your fixed mortgage payment no longer pays any of the principal and only the interest. If such a situation persists for too long, your financial institution can adjust your mortgage payment.

Trigger rates apply only to variable-rate mortgages – they don’t impact fixed-rate or adjustable-rate mortgages.

How trigger rates affect variable-rate mortgages

Knowing how variable-rate mortgage works is essential to understanding the logic behind trigger rates.

With a variable-rate mortgage, you pay a fixed payment at a specific time interval, such as monthly or bi-weekly. Your payment amount never changes during your mortgage term. However, the interest you pay with each payment may rise or fall as time goes on.

Your variable-rate mortgage rate fluctuates based on changes in your lender’s prime rate, which typically moves in tandem with the overnight rate.

For example, each time the BoC raises the overnight lending rate, the result is a higher prime rate. And when your lender’s prime rate increases, so will the rate you pay on your variable mortgage. But since your payment is fixed, your lender will apply a larger portion of it to interest and less toward the principal.

Should rates climb high enough, you’ll find yourself in a situation where your lender applies the entire payment to interest charges and nothing toward your principal. It’s at this stage that you’ve officially hit your trigger point.

Here’s an example to illustrate the concept:

Suppose you buy a home in Toronto in January of 2022 and finance the purchase with a $400,000 variable-rate mortgage. You negotiate with your lender the following terms:

  • 1.50% interest rate
  • Five-year term
  • 25-year amortization period
  • Monthly payments

Below is a table that shows how much of your monthly payment your lender would allocate to interest as your mortgage rate rises:

Overnight lending rateYour variable- mortgage rateTotal PaymentInterest portionPrincipal portionPercentage of payment applied to interest

As you can see, you’ll continue to pay $1,599 even as your mortgage rate rises. But interest charges will consume an increasingly larger portion of each payment. Eventually, you’ll reach the point where 100% of your payment goes toward interest.

Why do lenders add a trigger rate to variable-rate mortgages?

Your lender adds a trigger rate provision in your variable-rate mortgage contract to ensure you’re building equity with each payment you make. Naturally, if your entire mortgage payment covers interest charges only, you’re not gaining any equity.

Even worse, let’s say your fixed payment is insufficient to pay the interest. What this means is that your mortgage balance is growing rather than shrinking. This scenario is called negative amortization.

In our previous example, you’d have a shortfall of $68 if your mortgage rate were to climb to 5%. Technically, your lender would defer the $68 your regular payment fails to cover. They’ll add it to your outstanding balance, meaning your mortgage will increase in size – not good!

How your lender sets your trigger rate – and where you can find it

There are no universal standards lenders use to calculate trigger rates for variable rate mortgages – each has its unique method. In addition, lenders evaluate each mortgage individually, factoring in aspects like the contracted interest rate and payment size.

So, how do you go about finding out your trigger rate?

The easiest way is to examine your Mortgage Loan Agreement – it’ll be stated clearly in this document.

However, remember that your trigger rate isn’t set in stone and can change over time. For example, your trigger rate increases if you make a prepayment during your mortgage term. The reason is that a prepayment reduces your principal, which means fewer interest charges will accrue going forward.

Though it’s challenging to determine your trigger rate precisely, there are online calculators available that can provide you with a rough estimate. Mortgage expert Ross Taylor offers one such tool (developed by Francis Hinojosa, CEO of Tribe Financial Group) on his website.

You can also contact your lender directly and ask them what your trigger rate is – this option will provide you with the most accurate answer.

What happens if you reach your trigger rate?

Let’s say you reach your trigger point. In that case, your lender will inform you that your regular payments no longer cover any principal. They’ll recommend several solutions to get you back on track in paying down your loan’s balance:

  • Increase your fixed payment – By adjusting your payment upward, you’ll have more room to allocate a portion to the principal. However, your mortgage contract may have specific rules regarding how much you can add on top of your existing payment.
  • Contribute a lump sum payment – By making a prepayment against your mortgage, you can push up your trigger rate threshold. As with increasing the size of individual payments, your mortgage contract may restrict you to a maximum prepayment.
  • Lengthen your mortgage amortization period – Another way to alter your payment size is to increase your mortgage amortization period. However, depending on your mortgage type, this option may not be available to you.
  • Convert to a fixed-rate mortgage – You may have the opportunity to switch to a fixed-rate mortgage contract. Remember that fixed-rate mortgages are typically more expensive than variable-rate mortgages, so your regular payment may increase significantly. 

As you can see, you may have several options at your disposal upon breaching your trigger rate. But what’s crucial to understand is that you’re not obligated to act at this point. You can continue making your scheduled payments as though nothing has changed.

However, you must act once you’ve reached your mortgage’s trigger point.

What happens if your reach your trigger point?

Suppose you decline to readjust your mortgage after exceeding your trigger rate. In that case, your lender will keep adding more and more excess interest charges to your loan balance. Eventually, you’ll hit your mortgage’s trigger point.

The trigger point is when your balance owed surpasses the original principal of your loan. It occurs when too many deferred interest charges accumulate on your outstanding balance.

From your lenders’ perspective, hitting your trigger point brings you dangerously close to defaulting on your loan. As a result, they’ll promptly notify you and compel you to act by adjusting your mortgage payments, applying a prepayment, or converting to a fixed-rate mortgage. Typically, they’ll give you 30 days to decide.

Worried about being unable to afford your mortgage payments due to hitting your trigger point? Here’s how to prepare so you can avoid losing your home.

It pays to be proactive if you anticipate higher mortgage payments in the near future. Top up your savings account, slash your expenses, and consider taking on a side hustle. The more money you have available to weather a rising-interest rate storm, the easier it’ll be to manage your mortgage payments as they increase.

However, not everyone has the privilege to boost their disposable income at will. Perhaps you have little or no additional funds to work with, as you face a mountain of other debt: credit cards, lines of credit, payday loans, etc. Maybe the Canada Revenue Agency (CRA) is also chasing you for unpaid income tax.

Luckily, a little-known government-sponsored program in Canada can help you eliminate a huge chunk of your high-interest, unsecured debt. This program is called a consumer proposal, and it’s administered under the guidance of a Licensed Insolvency Trustee – the only professional with the expertise and authority to carry it out on your behalf.

By filing a consumer proposal, you can negotiate with your creditors to reduce your unsecured debt by up to 80%. This includes credit cards, lines of credit, payday loans, and even taxes you owe to the CRA. As a result, you’ll have more cash handy to keep up with your mortgage payments successfully – and ensure you don’t lose your home to foreclosure.

Book a free consultation today with David Sklar and Associates to explore your options and see how much debt you can eliminate.

Photo by Liza Summer

Take Your First Step Towards A Debt Free Life

If you are overwhelmed by debt, call us at 1-844-962-9200 to book a FREE, confidential appointment. We will review your financial situation in detail and discuss all of your options with you. Alternatively, you can fill out the form below and our team will reach out to you. 

Share This!

I was a little nervous going into my consumer proposal with David Sklar & Associates as I had a horrible experience attempting to file with a different group.Following the first correspondence, I immediately felt much more relaxed and confident in my decision.Beatriz was incredible! I feel so lucky to have had her working with me.She was friendly and kind, professional, patient, considerate, and caring. I felt no judgment in anyway. Honestly, speaking with her regarding my debt felt like I was speaking with a family member – just very easy to discuss how I ended up in my financial situation and being met with understanding, no judgment.Mark was also very kind and made sure that I understood what was discussed and was open to going over it again if needed prior to signing.David Sklar & Associates is the team you want handling and assisting you with your debt. I have only positive things to say about them and will 100% recommend them to anyone if the situation ever arises.
Helped me with filing for bankruptcy and getting a fresh start and made the whole process seamless and easy.
Sameer Kamal
I would like to say "Thank you very much" for David Sklar team that handled my case smoothly and without any issues! I am glad that I ve got consultation by Jerry Janiec. He explained me all process in details and told me right away what options I do have to resolve financial difficulties. I ve proceed with consumer Proposal option and entire process was very smooth. Jerry took care of my case and gave me personal recommendations for future! Thank you very much Jerry and Hernee for your help and really take care of your clients!
Alexander Arepyev
Very knowledgeable, helpful and fast service
Anthony Mcfeat
I am so delighted to have found this company. They are the best. Everyone in the office is very nice never to busy to assist you. Thank you David Sklar and Shirley and associates for being you. 😊🌺😊
Trina was amazing and quick. No judgement was made and they all made me feel I made the right decision. Would highly recommend them
Crystal Minaker
Trina was very easy to work with. Any questions I had were answered promptly. What seemed like a complicated process was explained in a clear manner that wasn't at all intimidating. It made for a more comfortable experience during a turbulent time.
Eldon Aubie
Jackie is very professional...I would recommend David Sklar to anybody especially knowing how understanding they are.
Kimberley Lyder-Niles
I had Shirley and Kim take care of my finances. From the very first moment I spoke with Shirley I could sense how caring, professional and patient she was. She was also very understanding with my lack of financial knowledge and never made me feel dumb as some other companies have.Her and Kim were always very quick to respond to emails, always available if I called and answered my abundance of questions in such detail that I now believe I have a thorough understanding of how finances work. I am hopeful about my fresh financial start and very grateful I had the privilege of meeting and working with these two beautiful women.I also spoke briefly with Richard over zoom and he to was extremely friendly, patient and made sure I was well taken care of.I could not recommend David Sklar and Associates more. Thank you again.
Shayleen Muzi
Good professional team! Jennifer is the best, helped me through everything and answered all my questions. Made the process easy! Would recommend Jennifer and the team at David Skylar.
gary round
DS david skalr icon

Book your free consultation.

Call 1-844-962-9200 or fill out the form below. We’ll do the rest.

Contact Us